Elektron stake in Hartest Holdings.

Elektron has recently taken a 23% stake in Hartest PLC.

Both Amshare and EKT's brokers Finncap have mentioned EKTs stake HTH therefore it would seem appropriate to form some kind of analysis of various options open to both companies. After looking at Hartest in depth lately it seems to me there are 2 options.

The first option being whether there is any future for HTH as a stand alone business. The second option what effects any acquisition would have on Elektron.

Option 1 Hartest prospects as a stand alone business....

Hartest PLC has had poor growth on turnover the last 5 years and erratic profits .

In 2004 turnover was £20.08 million and the year just gone year end 2008 turnover was £21.72 million. That's less than 10% increase in turnover in the 5 year period or put it this way an average of 2% a year. Though the company was in profit year end 2004, it lost money 2005 and 2006, 2007 the company made 0.38 million pre tax and year end 2008 the company made 0.88 pre tax. Forecast profits for 2009 are £1.01m.

However since the financial year end the company had a trading update on the date of the AGM on the 12th August 2008. This is what the company said....


"Sales by Group companies in the current financial year are in line with expectations but
margins are coming under pressure in some areas. The Group is not immune from the
general economic climate and the potential deferral of capital expenditure projects by
some customers.
Operating overheads remain under close control, but a number of additional expenses
are being incurred in respect of Group development and the necessary relocation of two
of our companies later in the year."

In order to evaluate Hartest prospects as a stand alone business I have analysed its various operations. as best I could with the amount of information available. What a right rag bag of operations it has too.


Based in Stansted, Essex, Agar Scientific is a leading international supplier of consumables, accessories and specialist equipment for all disciplines of microscopy.


Carnation Designs produces integrated electrical solutions and power management systems for specialist vehicles at its factory at Heckmondwike, Yorkshire.


Hartest Precision Instruments operates from two facilities in the Greater London area; Kingston and Croydon. The company manufactures, sells and distributes a range of specialist instruments and supplies for use in testing, measurement, performance improvement and research around the world. The company has the following separate branded activities - ASL, Sheen, Tinsley, and Wallace.
Cross Technologies operates from facilities in Sandhurst, Berkshire and is engaged in the distribution of specialist healthcare and medical equipment in both the public and private sectors throughout the UK and Ireland. The company trades under two separate brand names, namely CrossTech and QADOS.
On the medical side...Cross Technologies operates from facilities in Sandhurst, Berkshire and is engaged in the distribution of specialist healthcare and medical equipment in both the public and private sectors throughout the UK and Ireland. The company trades under two separate brand names, namely CrossTech and QADOS.

Cross Technologies operates from facilities in Sandhurst, Berkshire and is engaged in the distribution of specialist healthcare and medical equipment in both the public and private sectors throughout the UK and Ireland. The company trades under two separate brand names, namely CrossTech and QADOS.

Financial analysis

The year just ended the largest turnover division was the instrumentation manufacturing/distribution operations which had a turnover of approx £14.082 and made a pre tax profit of £1,141m However within this division they have Carnation designs , (click onto link for accounts ) which had a turnover of approx £1.5m and pre tax profit of approx 84k, Carnation had a deficit of £526,000 on its balance sheet at year end.

The medical distribution side had a turnover of £7.6 million and made 340k pre tax. As a rough analysis this division had approx £1.7 million of net assets.

Future as a stand alone business.

Quite honestly I don't think HTH has a future as a stand alone business. As I said previously HTH has a rag bag of businesses some of which are experiencing difficulties. The company needs to make its mind up whether its a manufacturer or distributor. The healthcare side is making little money and needs to be sold off. As for Carnation its done very little the last few years and I dont rate its future. Carnation would fit in better with a telematics related company. The problem being it has a deficit on its balance sheet and in these markets I am not certain who would buy it I suppose a MBO could be considered but uncertain where they would get finance!

The directors appear to have held on too long to a bad mix of operations in the hope of "jam tomorrow" that some posters have indicated on bulletin boards. I agree! If HTH attempt to dispose of various operations themselves they would end up with a small turnover business with relatively high overheads. Moreover the future for manufacturers is off shoring and HTH do not have offshoring facilities. To look into this now is too late in my opinion. But more concerning for the company is that they lost an important vote as to share issues at the last AGM. That will restrict the company developing the business from here on and obtaining more finance.

In conclusion as a stand alone business HTH future does not look good.

Option 2 to be acquired by a larger company.

The second option is to be acquired by a larger company and as we know EKT has taken a 23% in the company at a cost of £1.3 million according to Finncap.

To be acquired by EKT would make good sense for both companies. EKT has established offshore factories which would improve margins. In particular the instrumentation divisions would fit in well with Sifam, ideal for cross selling and less duplication on products. If EKT was to acquire HTH I would have thought they would sell off or give away Carnation for a nominal sum. With a bit of luck the distribution side could be sold off and reduce EKTs purchase for the entire group.

However EKT are not known for paying a premium price for any company. In the majority of occasions previously they have purchased businesses at a discount to net asset value.

At the moment based on a mid price of approx 51p the market cap of HTH is valued at just over £4 million. That compares to EKT's market cap of just over £10 million on a share price of 11.5p. Looking at the future profitability and growth prospects in both businesses HTH is set to have little prospects in growth going forward and a small growth in profits albeit they have now indicated difficulty going forward. The most that can be expected out of HTH the next few years is just over £1 million pre tax profits in my opinion. EKT brokers have forecast over £3.47 million pre tax for EKT 2010/11 compared to pre tax of approx £2 million last reported. Thats growth of approx 50%. Furthermoe Finncap forecast approx 20% growth in EKT turnover in the same time scale. Bear in mind growth in turnover and profits excludes any acquistions.

Compared to EKT the market cap of HTH looks expensive on growth prospects turnover/profits. Looking at prospects for HTH one would have thought EKT was reluctant to offer any premium if at all for HTH, more so now due to the world economics at the moment.

Private businesses are being sold for about 5 times earnings these days, if EKT was able to acquire HTH on a similar valuation once Carnation and the healthcare side are disposed of and the remaining operations consolidated within Sifam, with cost cuts and further offshoring I would expect earnings enhancing in the short to medium term for EKT.

Conclusion.

In conclusion if any HTH investors are thinking about the future HTH is going nowhere the next few years as a stand alone business in my opinion. They may well think its a good time to accept an offer should one come to the table. Moreover should they invest in EKT the company looks to have very bright prospects going forward.